IFS Has A Magic Growth Formula; But What About Profitability?

IFS Has A Magic Growth Formula; But What About Profitability?
P.J. Jakovljevic - December 19, 2000

Event Summary

In November, IFS Industrial & Financial Systems, a business applications vendor with main headquarters in Linkoping, Sweden, reported results for Q3 2000 (See Figure 1). IFS' net sales for the first nine months increased by 22%, to $161.7 million, compared with $133.1 million for the corresponding period in 1999. License sales rose by 92% to $64.4 million during the first nine months of 2000, with a license revenue increase of 106% to $11.4 million during the third quarter. Consulting revenue further increased dismally though during the third quarter, growing by 6% to $27.0 million, compared with $25.5 million for the corresponding period in 1999. However, IFS reported a loss of $18.6 million after net financial items, compared with a loss of $ 11.8 million for the first nine months of 1999. The third-quarter loss amounted to $12.5 million, compared with a loss of $10.9 million for the third quarter of 1999.

Figure 1.

Bengt Nilsson, president and CEO of IFS, commented, "We are pleased with the significant increase in license sales in the third quarter. Results for the third quarter are always considerably affected by vacation periods throughout Europe. However, the market is recovering strongly, particularly in the US. The positive consulting margins in September are evidence of better utilization of our consultants. With our consulting organization intact, we are well equipped to meet growing demand for IFS products and services. While we still aim to report a positive net earnings result for 2000, the late recovery of the market will make it difficult to achieve this goal. Our continued investment in product development has enabled us to remain in the forefront in terms of technology. An increase in sales of over 106% in the third quarter speaks for itself. IFS Applications 2001, our new product release that includes a wide array of e-business components, has met with an enthusiastic reception."

IFS was particularly pleased to announce strong momentum in the North American market with the last quarter producing the best performance to date in number and value of contracts in the United States. From July through September, the company closed deals valued at more than $20 million in products and services with 20 customers, predominately in the mid-sized manufacturing market segment.

IFS North America President and Chief Executive Officer Terje Vangbo commented, "This strong performance is further evidence that our component-based solution is gaining ever increasing acceptance among enterprises that need to evolve their operations one step at a time into e-business. With the North American market rebounding from the industry-wide slowdown of 1999, IFS is seeing not only an increase in the number of deals, but in the size of the deals as well. I believe IFS will continue to emerge as a business solutions leader in North America, particularly with the recent release of IFS Applications 2001 software. With its proven component technology, we expect IFS Applications 2001 to set the pace in the U.S. for e-business/supply chain integration. It will be difficult to match our solution with its integration capabilities, unlimited scalability, and new off-the-shelf e-business components."

IFS' newest U.S. customers represent a diverse range of industries, including plastics, automotive, fiber optics, civil aviation, electronic components, steel, and wood products.

Market Impact

We have only praise for IFS' fast growth and international expansion. Its formula for success seems simple, although apparently not easily emulated by competitors:

  • a flexible and technologically superior componentized product

  • a comprehensive e-commerce strategy

  • deep feature-rich vertical functionality

  • a number of standard APIs or XML-based interfaces

  • reputable customer service & support

  • prudent acquisitions and/or partnering moves in the past

Particularly at the lower end of the market segment and in regions where IFS has a strong presence (e.g., Nordic Region), it represents a generally low-cost, but viable option.

While the North American business unit, with headquarters in Tucson, AZ achieved very impressive results - a 234% revenue increase over the same period of last year - IFS' track record of successful regional implementations is still being made. Currently it is at the level of a couple of hundred customers. These results are crucial for the following two reasons: 1) to build the company's mind share in the world's most prospective business applications market, and 2) to show that the heavy investments IFS has made in North America over the past several years have begun to pay dividends. Although a newcomer in the North American market, IFS shows promise with a component-based product that enables it to more feasibly integrate traditional ERP with e-business, CRM and other extended-ERP applications. The company will also likely pursue the opportunity of preying on the customer base of currently struggling or all but vanished vendors.

IFS announced the availability of its new release, IFS Applications 2001, in August 2000. This release included 500 major product enhancements and the addition of 10 new modules. IFS Applications 2001 includes web-based components, Internet storefronts, customer relationship management (CRM) applications, connectivity to other business applications, and collaboration with process control systems with a variety of e-commerce engines. IFS Applications offers over 50 functional business components for improving business processes in medium-to-large size companies. Some major enhancements were:

  • Completely integrated CRM Solution with Sales & Marketing, Call Management, Sales Configurator and WEB Store.

  • Portals implemented for the whole IFS Application product suite.

  • Flow manufacturing with support for Kanban.

  • Integrated Business Performance solution with Data Warehouse and Cube configurator capabilities.

Despite IFS' presence in 42 countries, the challenge of further international expansion and brand awareness remains. The perception of poor scalability and less-than-global presence within the higher-end of the market are the hurdles yet to be overcome. There is also room for improvement in its currently undeveloped indirect channel, which has been a major success factor for other companies in the mid-market. Moreover, one should closely watch IFS' future profitability track. The company has posted five losing quarters out of the last six (See Figure 1), and its shareholders' confidence may deteriorate until they see a more consistent profitable performance. The mitigating factor in this regard is IFS' solid current stockholders equity.

User Recommendations

IFS' customers should certainly consider the new product offering, but avoid selecting it without looking at what the other vendors have to offer. We encourage users to familiarize themselves with the company's ambitious new products offerings and their availability, at least to better leverage their negotiating position with other vendors involved in a particular selection exercise. We generally recommend including IFS in a long list of an enterprise application selection to mid-market and low-end tier 1 companies (with $50M-$1B in revenue) within its industries of focus. IFS worldwide has identified eight key vertical markets which are: aerospace & defense, telecommunications, repetitive/automotive, engineering and project delivery, internet entrepreneurs, service management, energy and utilities, and forest segments. In the USA, however, the focus is on only the first six verticals mentioned.

IFS is also a good candidate for technologically aggressive organizations that need a highly configurable solution. Remotely hosted Internet solutions may offer cost effective applications to small or mid-sized organizations, bearing in mind the ramifications of any necessary customizations.

Current and potential users may want to inquire about the company's plans regarding Internet marketplaces in their respective industries. While the upgrade to its technology platform, called Foundation 1, is expected to make it easier to connect the components within the IFS Applications suite to the Internet as well as to third-party applications, and the new platform makes use of XML and industry specific communication standards such as those from RosettaNet, being all things to all people is very difficult. Therefore, users need to ask the following questions: which specific market places does (or will) IFS connect with, and what methodology does (or will) the company prescribe to.

Potential clients should conduct preliminary research on industry expertise and reference sites of a regional IFS office or an affiliate service provider when IFS is included in the selection process due to its nascent distribution network outside of the European market. As with all new releases, users should employ a critical approach in their evaluation of IFS and require the vendor to demonstrate specific business processes. Though demonstrations do not guarantee a trouble-free implementation, they can go a long way toward helping users understand how the software might behave in their environments. Also note that release 2001 is scheduled to be available in the USA only in March 2001.

Editor's Note:
This article has been modified from its original form since the original publication date.

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